Momentum Investing

There are many methods of factor investing; value, growth, small cap, mid cap large cap and several trading strategies, buy and hold, day trading, swing trading are all popular. Another that is favored by the short term investor is momentum investing. Investopedia defines it as a strategy that aims to capitalize on the continuance of existing trends in the market. A trader takes a long position in an asset that has shown an upward trend in price with the idea that the trend is established and it will likely continue.

All strategies and methods work some of the time but none work all of the time. Momentum investing is somewhat easy to employ because all you are doing is looking for the stock, bond, currency etc. that are moving up or down and have moved for a period of time in one direction. How long of a period of time is very subjective. Once you spot the trend you enter the trade. The much more difficult task is knowing when to exit the trade.

It is always prudent to establish rules. For instance to ‘buy’ maybe the rule it that the stock has to be in an uptrend over a three month period of time. Or that the price of the position has to be up 10 of the last 15 trading days with the price up 5% over that time period. The buy and sell rules can be anything you wish. A ‘sell’ rule might be a breakdown of a short term trend line or a break down below a 10 or 20 day simple moving average. The important part is having rules and sticking to them. If you find they do not work then adjust the rules and then implement those changes without fail. Otherwise you are just guessing at price points to enter or exit. Guessing never leads to success when it comes to investing.

The trader using momentum investing should be prepared ‘not’ to succeed. There is no magic formula or secret method of success, that kind of thinking will lead you directly to the poor house. The same is true for day trading, that strategy is even more difficult to implement and be successful. Over long periods of time the tried and true success comes from buy and hold with a deep knowledge of the stock you are buying. Once you find those companies with solid fundamentals, than you can apply a value or growth strategy. This is a hallmark for long term wealth building. Typically momentum investing has shades of a growth strategy.

Though it would seem simple it is not because at times a winning strategy has to be measured over years not days, weeks or months. Warren Buffet, the acknowledged long time world’s best investor, has a time horizon for stocks he buys set at forever. His idea it to own the whole company and just hold it. He also is a deep value investor and waits sometimes for years to put fresh money to work. Of course he also has an advantage in that his insurance companies keep providing him with fresh cash to invest so that he never has to worry about being able to take advantage of an ideal company or for that matter a time to enter the market. His favorite time to invest is during recessions. He likes to quote other successful investors in history or make up his own quotes. My favorite, though a bit morbid, is ‘buy when there is blood on the street.’ As long as you don’t remember its origins it is a good way to invest. The saying comes from the crash of the market in 1929. Brokers lost all their money and many decided to jump out the window to commit suicide rather that to live in deep poverty. It was a time when you could borrow far more money then you could every pay back if you lost it. Today we have rules to prevent that.

It is never easy for any of the methods you chose to use to invest, but the stock market is a place for building wealth. Owning companies and growing with them is the formula for the patient investor. All others are fraught with much greater difficulty.